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Today is April 1st, April Fool’s Day, and yes, the title is a hoax. To my knowledge there is no organization known as the Council of Leading US Economists, or C.L.U.E. for short, which projects the Dow to reach 50,000 during the Trump presidency.
As I wrote last year in an article titled, “ Should You Treat Wall Street Forecasts Like April Fools Day Jokes ?”, emotionally charged market headlines, however, are no hoax.
For years, Wall Street analysts have been generating them through overly bullish projections. So has the financial press, which routinely tries to come up with a reason to explain exactly why every minute-to-minute short-term market fluctuation has occurred.
Unfortunately, for those who act on headline hype, the potential damage to their wealth can be great.
Studies consistently show that investors tend to sell low and buy high. And now, investors might be navigating an even more dangerous intersection. A place where deep philosophical divisions meet internet profit models that reward “clickbait” headlines that often have nothing to do with good financial decisions.
The Legacy of Wall Street: Too Much Bull
Wall Street professionals, by the way, are every bit as emotionally vulnerable to bad behavioral decisions as their clients. In a 2010 study, McKinsey & Company wrote:
“Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined. On average, analysts' forecasts have been almost 100 percent too high.”
The McKinsey research , which followed a similar study from 2001, showed that earnings growth for S&P 500 companies surpassed analyst forecasts only twice in 25 years. Most of the time during the 25-year period, analyst forecasts significantly exceeded the actual growth.
One explanation for their bullishness: market analysts suffer from Stockholm Analytical Disorder, otherwise known as S.A.D. Yes, this disorder was a little April 1 st fun as well, but do analysts sometimes become captives of the very companies and industries they analyze and, in doing so, lose their objectivity?
Clickbait Headlines, Research Nobody Reads, and Your Money
Recently, a leading financial publication reported that institutional investors only read about 1% of the research that Wall Street cranks out. Another publication , every bit as venerable as the first, then quoted an industry insider who explained, “A lot of it is cr@p that clients won’t pay for.”
Beyond the “clickbait” nature of these quotes, to me it raises a fundamental question:
Why do so many write or follow investment headlines that are often the product of research institutions don’t pay for and can’t be bothered to read?
As examples, just yesterday I noticed a why “It’s Time to Be Bullish” article immediately followed on a newsfeed by a “Let’s Prepare for Bad Times in the Stock Market” shocker, which included a picture of a person visibly pained and scared so much that they had to hold onto a doorway.
Yes, sensational headlines are not new and are here to stay.
Wouldn’t it be nice though, if just once you saw something published like the following that was based on the evidence of the accuracy of Wall Street’s predictions?
“Your performance would likely improve if you don’t emotionally react to our latest tactical trading idea or get too anchored on our latest prognostication.”
How can investors avoid being harmed by Wall Street’s almost daily April Fool’s Day headlines?
As I have written many times before and will keep writing, first, make sure you have a solid long-term plan (with emphasis on "long-term") that is prudently diversified and designed to meet your goals, not the investment models or emotionally charged product pitches of others.
Second, avoid taking action on emotionally charged market headlines. It is useful to take in various points of view and debate investment ideas, but keep in mind that following the investment herd often doesn't yield good results.
Finally, history consistently teaches us that true long-term investors are often rewarded. Please remember, investing should be a means to meeting your long-term objectives, not a competition.